Challenges Small and Midsize Businesses Face During an Economic Downturn

Jeni_Odley

Even the thought of a recession sends most business owners into a cold sweat. For those that survived the Covid-19 pandemic, a global economic downturn is yet another hurdle to overcome. A recession is a prolonged and widespread decline in economic activity, generally identified by two successive quarters of negative gross domestic product (GDP) growth. Recessions may be triggered by economic changes, such as a sudden spike in oil prices or an accumulation of financial risks during healthy economic times. Although recessions are an inevitable part of the business cycle, they still bring uncertainty to small and midsize businesses (SMBs). Recessions typically last between 2 to 18 months but leave a lasting mark on the economy.

Are we in a recession?

2020 will be forever remembered as the year Covid struck, plunging society and our global economy into turmoil. The lowest global downturn ever recorded ensued, with volatility throughout 2020 and 2021. Although a strong rebound followed in 2022, it was not without multiple economic shocks, from supply chain issues to geopolitical uncertainty. 

The global economy is predicted to expand by around 1.6% in 2023. Despite this, almost two-thirds of respondents in a recent survey expect a recession this year, with SMB owners listing inflation as a top concern. The US is currently experiencing inflation levels unseen for over 40 years. Families are struggling to put food on the table amidst job cuts and a seemingly ever-increasing cost of living. Although the US is not officially in a recession, many experts believe it is on the brink. Rising fuel prices, supply chain disruptions, and aggressive Federal Reserve hikes are to blame for at least some of the US’s economic uncertainty. 

Which challenges do SMBs face during an economic downturn?

There is no denying that economic downturns bring uncertainty to SMBs. Although companies of all sizes face challenges during recessions, smaller companies tend to be more vulnerable due to restricted resources and lack of scale. After struggling through almost three years of Covid-related disruption, there may still be a rocky road ahead for SMBs. 

1. Dwindling demand and low product quality 

The impact of a recession is felt throughout all parts of the economy. When prices for basic necessities rise, people have less money to spend on other things. This time, many people have to choose between a tank of fuel and food on the table, leaving little money for anything else. Naturally, this impacts product demand, causing financial pressure on businesses with surplus stock and few buyers.

Some SMB owners may cut corners on product materials to offset financial losses through decreased demand. Although this may offer short-term relief, cutting corners on raw materials can negatively impact a company’s image. Moreover, so-called shrinkflation, where companies offer less of a product for the same price or more, may also be regarded as a drop in quality. Consumers value quality even more when money is tight, and they may look elsewhere if they realize product quality suddenly drops.

2. Cash flow problems

Consumers are not the only ones with cash flow issues during an economic downturn. Decreasing sales may mean that cash-strapped businesses struggle to make timely payments, exasperating cash flow problems for SMBs. Chasing payments takes time and effort, and businesses may only be able to pay back debts in installments. Moreover, companies that close due to poor economic conditions will be unable to pay outstanding debts. Small companies tend to have less access to capital resources, leaving them scrambling for cash during times of recession. 

3. Reduced access to capital 

Banks and other lenders tend to tighten the reins on lending during economic downturns. This is bad news for SMBs with cash flow problems, as their access to capital resources is limited. Moreover, banks may implement a more stringent application process and assess the creditworthiness of loan applicants with heightened skepticism. Even if applications are successful, borrowing costs may increase, leading to higher fees for SMBs. 

4. Increased competition

Poor economic conditions and the threat of failure create an intense fight for survival among SMBs. Companies are left to compete for limited resources, which may be fatal for those with poor financial planning or cash flow management issues. Increased business competition could create opportunities for SMBs to branch into other, less populated markets and fill the gaps left by those that did not survive.

5. Supply chain disruptions 

The impact of a recession tends to trickle into all areas of the supply chain. When consumers spend less, demand decreases, leading to a low-demand, high-supply scenario. As consumers curb spending to save money, inventory purchased by hopeful SMBs sits collecting dust. Moreover, import and export tariffs are likely to change during times of economic uncertainty, causing an increase in supply chain disruptions.

A surge in online sales during the Covid-19 pandemic led to a backlog of shipping containers, with sea freight costs jumping to a record high of almost USD $10,400 per container in 2021. Such unexpected delays can also impact the supply chain and cause consumer confidence to drop even further.  

6. Layoffs and low employee morale

When cash flow stalls, businesses must do anything they can to survive. Unfortunately, job cuts are often high on the list of cost-cutting endeavors. In the 2008 recession, the US unemployment rate continued to creep from 5% to 10% even after the recession officially ended. Some companies may put recruitment on hold, meaning existing employees get an increased workload without additional benefits. Other companies may decrease employee benefits in a bid to save money. Knowing their job is at stake or worse, seeing coworkers being made redundant, negatively impacts employee morale.

The bright side

It is easy to focus on the negative aspects of economic recession. After all, it may not seem like there is much to celebrate. But despite the doom, there are ways to make the most of poor economic conditions and leverage new opportunities.

1. Low borrowing rates 

The Federal Reserve tries to keep the rate of inflation between 2 - 3% annually. If inflation rates fall below this target, the Federal Reserve usually decreases interest rates to stimulate economic growth. Interest rates are also adjusted in times of recession. As a result, banks may offer low borrowing rates to companies with a good credit rating, giving them the financial capacity to hire more staff, relocate, or purchase more stock.

2. Cheaper product supplies

Each part of the product supply chain feels the strain of a recession. Suppliers may lose orders, causing a backlog of unused inventory. As a result, this could be a good time for SMBs to negotiate better prices with suppliers looking to offload their stock. SMB owners with limited financial resources may also benefit from strong supplier relationships, as suppliers may be willing to provide stock on a loan basis, receiving payment in installments or at a later date.

3. Focus on marketing

Slower daily operations mean SMB owners have more time to assess their current marketing strategy. Although this may seem contradictory, increasing marketing efforts when competitors fall silent is a great way to stand out from the crowd and could even attract new customers. Moreover, businesses may consider diversifying their offerings or adapting their existing business model to ensure multiple income streams. 

4. Improve efficiency

Economic downturns are notoriously difficult to navigate, but it is also a good time to streamline internal processes. Making do with less resources forces companies to examine where they can save money while maintaining a quality product or service offering. Business owners that take time to self-reflect can improve their organization from the inside, which will benefit them when business starts to boom again. 

How to survive a recession with software and devices

Recessions send businesses into survival mode. Companies should ensure computer systems are updated during tough economic conditions to avoid unexpected breakdowns. Refreshing hard- and software helps companies save money in the long run, as repairs can be costly.

Device as a Service (DaaS)

DaaS is a business model that alleviates the burden of purchasing, managing, and updating a company’s entire device portfolio. It allows companies to lease bundles of management services and technology, such as PCs, smartphones, and mobile devices that are fitted with pre-configured software. Bundles are payable monthly, shifting from a capital expenditure (CapEx) model to an operating expenditure (OpEx) model with a predictable pricing structure. DaaS bundles provide access to the latest technology without making significant investments.

Acer’s DaaS solutions give companies flexibility and control over their digital workplaces. Monthly or quarterly payment structures streamline expenses and are fully scalable, letting companies expand their bundles at any time. Acer works towards its sustainable business goals by reducing the amount of pollutants and hazardous substances in its products. Users can rest assured that devices can be recovered, reused, and recycled when they reach the end of their useful lives, creating a more sustainable future for businesses. By keeping old devices out of landfills, we can protect our planet and effectively use our natural resources.

Software as a Service (SaaS)

SaaS enables users to connect to cloud-based apps via the Internet. Cloud computing allows company employees to send and access information over secure online connections. This can include email providers or cloud-based printing solutions. SaaS systems offer companies increased flexibility, boost collaboration, and enhance security. In fact, 94% of respondents in a recent survey said they noticed improved security since switching to cloud-based services.

Acer’s SaaS print management system keeps print jobs secure while delivering flexible solutions for all endpoints. It offers centrally-managed printing across all devices and saves management and helpdesk costs.

Conclusion

Recessions are an inevitable part of the business cycle that plunge businesses and consumers into economic uncertainty. Unfavorable economic conditions can cause job cuts, supply chain issues, and even insolvency. However, companies can protect themselves from the brunt of a recession by finding ways to cut costs, streamline processes, and negotiate with suppliers. As we move into uncertain economic conditions ahead, SMB owners can begin to focus inward and consider which areas of their business can improve. SaaS and DaaS systems from Acer offer flexibility and security when economic conditions do not.